Nokia's second-quarter profit falls 61% on charges

Finnish handset maker gains market share as sales, shipments rise

By

AudeLagorce

LONDON (MarketWatch) -- Nokia Corp., the world's largest maker of mobile phones, posted a 61% drop in second-quarter profit on Thursday as restructuring charges weighed on the bottom line, but an increase in sales and shipments and optimistic remarks on the rest of the year eased concerns that economic woes would erode demand for phones.

Shares rose 9.5% in Helsinki as investors focused on the strength of the underlying results and on the Finnish company's continued market share gains. The results came as a relief after the profit warning from Sony Ericsson
SNE, +0.82%
(ERICB)
ERIC, +2.38%
last month.

Nokia's
NOK, +0.87%
net income for the three months to June 30 fell to 1.1 billion euros, or 0.29 euro a share, from 2.83 billion euros, or 0.72 euro a share, earned in the year-earlier quarter, when results were boosted by a gain on the formation of Nokia Siemens Networks.

Excluding a 201 million-euro restructuring charge and a 259 million-euro charge related to the closure of its Bochum plant in Germany, Nokia would have earned 0.36 euro a share, in line with consensus forecasts. The adjusted earnings figure is the one closely tracked by analysts to gauge the strength of Nokia's performance.

Nokia's market share in the quarter improved to 40% from 39% in the previous quarter and 38% in the year-earlier period.

"Nokia delivered increased market share and strong underlying profitability in the quarter. Looking at the rest of the year we are optimistic and have good feedback about the broad range of new products we expect to sell in our device business," Chief Executive Olli Pekka Kallasvuo said in a statement.

Nokia said the increase in market share was driven by its strong position in the fastest growing markets globally and by share gains in Latin America, Asia-Pacific and a slight increase in North America.

Mats Nystrom of Enskilda said the overall results trigged a "sight of relief." He called them "solid" given a "difficult environment with lots of concern about demand for mobile devices in emerging markets and a declining device market in western Europe.

Nokia also slightly raised its forecast for the global mobile phone industry, saying it would grow 10% or more in 2008 compared with an earlier forecast for growth of about 10%.

Although Nokia shares rose markedly in reaction to the results, they are still down about 35% since the start of the year.

Average selling price continues to decline; North America gets better

The average selling price of a Nokia phone continued to decline in the quarter as a higher proportion of sales came from emerging markets where people sometimes spend as little as $25 on a phone and the weakness of the dollar continued to bite. The average selling price was 74 euros this quarter, down from 79 euros in the first quarter. About 40% of the decline was due to currency fluctuations.

Carolina Milanesi, research director in the mobile device and consumer services practice of Gartner, said Nokia's overall results were in line with her expectations.

She stressed the increase in shipments to North America, where the company has been struggling for years and is now determined to establish a firmer footing.

Shipments in the region rose 9.8% to 4.5 million units.

"This is great news for them because it's critical that they show they're making some improvements," she said.

Nokia's performance could further improve in the next quarters, Milanesi said, as it refreshes its mid-tier and high-end portfolio. In particular a touch-screen device is expected in time for the holiday season and should allow Nokia to better compete with Apple, Inc.'s
AAPL, +1.63%
iPhone.

"If they get it right the touch-screen device could give them a lot of traction," Milanesi said.

The top end of Nokia's portfolio generates the bulk of its profit. Although the range represents just 14% of the company's total volume, it contributed more than 35% of total device revenue in 2007.

Nokia said Thursday that it's already announced 10 new models in that segment for the second half of the year and plans to unveil several more.

Sales at the telecoms equipment joint venture Nokia Siemens Networks rose 18% to 4.1 billion euros. Kallasvuo said the division is making encouraging progress but said competition remains tough and the price environment is aggressive.

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